Indonesia to cut royalties in downstream coal sector

A new Indonesian government law will slash royalties for companies expanding in the country's downstream coal industry.

The omnibus job creation law passed in parliament this week paves the way for the updating of existing regulations, while enhancing the ease of doing business in the country and includes a provision amending the 2020 mining law.

With the amendment, coal producers that invest in the downstream industry will enjoy a 0pc rate on royalties for coal produced compared with the current 13.5pc for PKP2B and IUP permit holders. The reduction is aimed at attracting coal producers to invest in the emerging downstream industry, such as coal gasification projects.

The Indonesian coal mining association welcomed the incentive, saying that this will make it easier for companies to invest into the downstream industry. Building infrastructure and developing technology in the downstream sector entails significant funding from companies, with payments otherwise used for royalty fees can now instead be channelled into the expansion of the downstream coal sector.

The 2020 downstream mining law breaks down the sector into four areas — the manufacturing of coke, coal liquefaction, coal gasification and the use of coal at mine-mouth power plants where generation is fed into the national grid and can be used by the public.

The move will benefit Indonesia's earnings from coal production, as well as developments in the downstream coal industry, and allows the country to recover losses in earnings from taxation of value-added coal products. The country can also reduce its dependence on LPG imports once coal gasification facilities become operational, the Indonesian energy ministry said.

Most mine-mouth power plants are currently small scale and are used for in-house generation by industrial businesses, while coal gasification is still in its infancy. State-owned coal producer Bukit Asam is currently the only mining firm that has made concrete commitments for a coal gasification facility in the country having signed an agreement with state-owned oil firm Pertamina to supply methanol produced from coal earlier this year.

By Antonio delos Reyes